Gas, coal and investment

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The ongoing move to gas as a source of cheap energy is a great hope for the US over the medium term. The WSJ reports that even truck fleets are making the switch (ht Jim Hamilton).

It is a great thing to have cheap energy, and i suspect that fracking will supply first the US, and later the world, with abundant cheap (and clean) gas.

It is difficult to export gas (which is why the Australian gas investments are mega-projects) so at this point US gas prices have collapsed, while Asian Gas prices (our customers) remain higher. Because gas is difficult to export, the immediate threat is not to Australian Gas exports and investment projects – it is to our coal exports / investments.

The collapse in US gas prices has led to substitution away from oil and coal – both of which are much easier to export. Displaced US coal is being exported, and this is lowering global coal prices. My expectation is that displaced US coal will continue to depress global coal prices, and that the lower price will diminish the incentive to invest in additional Australian coal production.

We get an update from the ABS on investment intentions today – I suspect the period where capex surprises with strength is now over. My guess is that plans will be revised down, and that some of the so-called ‘baked in’ projects will never make it ‘into the oven’.

Without a mining boom, we never would have raised rates – like almost everyone else – so the investment unwind ought to mean a return to 5% mortgage rates.

How low does the RBA’s overnight cash rate have to go to get mortgage rates down ~5%? That depends on funding markets. Right now my guess is that you would need a 1% cash rate.


  1. Capex reasonably strong in first quarter, an intentions still look good. UE 4.9% and with AUD down, tradeables inflation is likely to rise.

    To be honest I see no case for a rate cut next week from a domestic point of view. Sure Europe is weighing but why not save ammo for when Europe actually blows up? if we’re jumping at shadows and cutting rates every time there was some market volatility then we’d be at zero already. Market activity does not equal economic activity

    Just my humble view anyway

    1. Yeah, capex looked okay today. It is all in WA, but that’s probably as expected.

      Next week is hard for me – does the RBA already think the evidence on global activity is such that they downgrade growth and inflation by enough to cut the cash rate 25bp?

      I judge that the answer is yes – but i would like to see the PMIs and non-farm payrolls before i cast my lot.

      Sent from my iPad

  2. I can tell you from experience a depreciating currency does not increase inflation by anything like most people expect particularly now when the economy ex-mining is essentially treading water

    1. Totally agree. My strong view is that the AUD is falling because market estimates of global AD are falling, and in this case it is not inflationary. I have been meaning to write about ‘wrong thinking’ on the currency – perhaps i will this weekend.

      Sent from my iPad

      1. Also agree. You should – maybe Chris will read it, he always seems to worry about tradeables inflation. On your broader point, monetary policy has been too tight here for the last two years. The RBA needs to get ahead of the curve and cut aggressively or else we will end up like the rest of the West with near-zero rates. As Friedman said, low rates are a sign that money has been too tight, not too lose

        1. That is such a good quote. What he meant, i think, is that low rates signal low Inflation expectations, which means policy has been too tight. In this case, there has also been a large drop in real yields, which i pointed at (without going into) in the dudley post.

          I have not decided if that is a purely real thing, or if there is a monetary policy component – do you have a view? Links welcome :)

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      2. “I have not decided if that is a purely real thing, or if there is a monetary policy component”. Not quite sure what you mean – do you mean whether the fall in yields also reflects a drop in inflation expectations? I think it will be hard to keep inflation (in the US) close to the 2% target with GDP growth at 2% and falling.
        BTW, Bill Evans is now calling for a 2.75% cash rate by the end of the year.

        1. I mean, do you think that a declining neutral real rate is an indicator of too tight monetary policy?

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